National Institute of Economic and Social Research

Monday, 2 July 2012

easyMoney could save the eurozone

[This article is joint with Declan Gaffney, who blogs (mostly on welfare and benefit related issues here; it was prompted by a twitter conversation with Sue Marsh, also a prolific blogger on disability issues. After writing it, we became aware of this FT article by James Mackintosh, who obviously thought of the basic idea first, but having written it we thought it was worth posting, and it makes some additional points].

A few weeks
ago it was reported that a group of holidaymaking Germans in a Cretan bar
refused to pay their bill on the grounds that it was "their money".
Unsurprisingly, a fight broke out. This
microcosm of the political and economic troubles of the eurozone is revealing -
because both sides had a point. More
optimistically, it points to a possible solution to the fundamental problems of
the eurozone that could benefit all sides.

The key to
this lies in a simple question raised with us (on twitter) by Sue Marsh [Sue discusses our conversation here] . The most embattled eurozone
economies are also popular holiday destinations, so why couldn’t policymakers help resolve their difficulties by channelling
money to the citizens of less troubled countries to spend on holidays in these
destinations?

That may
sound too good to be true: in fact, it goes straight to the heart of the issue. The European Central Bank has understandably
objected to buying bonds from countries in difficulty, on the grounds that this
is less a monetary policy operation than a bailout. We agree. Instead, they should buy bonds from
all eurozone countries. For those countries in difficulty, this would just be
quantitative easing.

But the key
is what other countries, such as Germany, would do with the money. Our proposal is that they should issue
vouchers to their citizens, redeemable only on spending in goods and services
in those countries suffering financing difficulties (Spain, Ireland, Portugal,
Greece, Cyprus and Italy). Holiday vouchers, in other words. So German
holidaymakers could pay for their drinks in Cretan bars (and their flights,
hotel bills, souvenirs, ferry tickets and the like) with "money"
created by the ECB and distributed to them by their own government. The Greek businesses would in turn be able to
trade in the vouchers for euros from the German government (via the banking
system and the ECB).

This solves a
number of problems. It would loosen monetary policy across the eurozone and
ease the financing problems of the periphery countries. But most importantly,
as Martin Wolf has long argued, the fundamental
problem of the eurozone is not fiscal profligacy in periphery countries, but
internal current account imbalances. Consumers in the periphery countries have been
spending on goods and services from Germany and the Northern countries, but not
vice versa, financed directly or indirectly by capital flows from those same
countries. Now those flows have dried
up; so one way or another, the current account balances must be corrected.

Our proposal
would do exactly that, quickly, directly and in a growth-friendly way. Tourism
is a major export in all of the countries listed above, especially Spain and
Greece. It is a large employer, especially of young people. And - unlike other export industries which
will take time to establish international competitiveness and to expand - it is
flexible and can respond quickly to increases in demand.

Crucially -
unlike virtually anything else on the table at the moment - our proposal could
be politically sustainable across the eurozone.
It would address imbalances by boosting export demand, growth and jobs
in the periphery countries, not by imposing self-defeating austerity or years
of grinding "internal devaluation"; policies we have already seen are
doomed to failure both economically and politically.

And it addresses the legitimate concerns of citizens
in Germany and elsewhere in the North.
It would not be a gift or a bail-out.
Rather than restoring balance by asking workers and companies in Germany
to become less competitive or productive it would do so by raising their real
wages and increasing their consumption. And rather than asking the German government
to increase taxes or borrowing to bail out "profligate" southerners,
it would enable it to give something of real value to its own citizens to the
benefit of the whole eurozone.

Finally, it
should be acceptable to the ECB, which would be able to loosen monetary policy,
but without having to worry about the inflationary consequences, since it would
boost demand precisely in the regions which are currently suffering from
deficient, rather than excess, demand.

The basic
idea is not new: Milton Friedman famously recommended that in extreme
circumstances the fiscal and monetary authorities, working together, could
solve a depression with "helicopter money." Our proposal is a version of that, but with
the crucial difference that it addresses not only the eurozone's overall
shortage of demand, but also the internal imbalances that threaten to tear it
apart. Call it easyMoney.

5 comments:

The voucher idea should work without any involvement from the banks. Have, say, the Greeks create holiday vouchers redeemable in Greece and distribute them, helicopter them if you will, in Germany. When the Germans redeem them in Greece they'll spend a lot of Euros too, no doubt, thus correcting the imbalance between the economies. It would make things extra peachy-keen for the Greeks if they'd use the vouchers as local currency too. The banks wouldn't like it but the banks are going to have to go anyway.

Totally unrelated but I have carers assassment vouchers and spend them at local care agency, could have cash a lot of financial assessing and producing of reciepts as to where you spent the money, but but none of that just tear one of and sign each have their own number and worth ie 1 voucher = 1 hour. I get 78 vouchers a year, which is the max you can get without much admin at all. Voucher systems seem old fashioned but in this case work!

Brilliant!It's simple, non-technical, it does not involve financial institutions, and even better, it's fun!Could that scheme solve the entire crisis of its own? Possibly not, but what's for sure is that it cannot do more harm than good.

So why is it not going to happen?Probably because central bankers are moralists who dislike both moral hazard and fun.But maybe also because they would be afraid of the knickname those vouchers could soon receive in Germany: Drachma.

1) The ECB can only buy bonds in the secondary market; "helicopter" money flows to the bond market, not governments. Direct ECB financing of sovereigns is not possible.

2) The idea that you can raise domestic demand in the PIGS without having any effect on Eurozone-wide aggregate demand, or inflation, is... fanciful. There are no capital controls. Money can and does flow across borders. If German tourists spend more money in Greece, Greece will likely import more German beer for them.

3) If the ECB did want to raise Eurozone-wide AD they could cut interest rates or do more LTROs, or whatever. They are not at the zero bound. That they do nothing is an indication they are perfectly happy with the current level of Eurozone AD.

4) If the German government decided that it wanted to provide "real value" to its citizens, why would it choose spending which specifically attempts to suck demand out of the German economy through higher imports (foreign holidays)? The idea of Merkel doing this is totally fantastic. In the sense that it is a fantasy.

5) Why not just run contractionary fiscal policy in Germany (they have quite high debt) and have the ECB offset it with higher EZ-wide AD, if that is what you (Merkel) wants? (lower interest rates, QE, more LTRO, or whatever)